Dealpolitik: Process Can’t Shift Sentiment in Dell Deal

Dell board members and their advisers seemed to do just about all they could to make this buyout process a fair one.

The efforts were lauded in a little-publicized hearing in Delaware late last month, where plaintiffs lawyers were trying to hold up the buyout.

In terms of process, it does not get much better for directors than this statement in that bench ruling by Delaware Chancellor Leo Strine Jr.: “I do not see any plausible, conceivable basis in which to conclude that it is a colorable possibility that you could deem the choices made by this board to be unreasonable with all the different safeguards.”

Yet, despite the praise on process, this deal continues to be mired in controversy and negativity, and now might not get done at the $13.65 proposed by Michael Dell and Silver Lake Partners.

Besides Michael Dell, the folks behind the deal seem iffy on the company’s prospects. Silver Lake is reportedly unwilling to kick in more money to curry shareholder favor despite growing skepticism that the deal will receive the necessary vote.

The special committee of Dell’s independent directors support the buyout because of, among other things, Dell’s deteriorating financial outlook, management’s inability to produce reliable numbers and the committee’s concerns about management’s implementation of the company’s transformation strategy.

Just Friday, Dell once again talked about its business’s problems, saying PC business woes threaten the company’s transformation and that its PC exposure will likely continue to weigh on its share price, should it remain public. Shares slumped Friday, down 2% to $13.05.

Carl Icahn lays out a more hopeful vision. But his proposal is for Dell to use its own cash to make a $14 per share cash tender using Dell’s own cash and new borrowings. He isn’t stepping up to buy the company at $14 per share or any other price.

As Judge Strine repeatedly pointed out his bench ruling, which in effect denied plaintiffs’ lawyers an expedited path towards an injunction against the deal, Icahn is not proposing to buy the company. Chancellor Strine asked: If Icahn really thinks Dell is so valuable why isn’t he proposing to buy the whole company?

Icahn has support for his proposal, particularly from Southeastern Asset Management. But apparently Southeastern didn’t think enough of the Icahn plan, or at least its chances, to hold on to all of its Dell stock, half of which it sold to Icahn for less than the $13.65 deal price.

Dell had a robust “go shop,” to flush out other bidders, but in the end no one came to the table with a firm buyout offer.

How could a deal that has received such favorable reviews from a procedural perspective, including in this column, end up with such negativity?

Much of the blame has to be laid at the feet of management, the directors and Michael Dell himself. They did not prepare the Dell shareholders well for a buyout which seems to be based largely on a failure of management’s strategy to produce results.

Dell has supposedly been in a strategic transformation for several years. Yet in arguing for the deal, Michael Dell says that it is “still in its initial stages.” He argues that “Completing Dell’s transformation as quickly as possible is essential.” Yet it is not clear that this same sense of urgency existed before he decided he wanted to buy out the public shareholders.

And he argues that taking the necessary actions for the transformation “could continue to adversely affect Dell’s stock price.” That has to be a pretty bitter pill for shareholders to hear in his arguing for a $13.65 per share buyout price. Where was the concern that the share price would decline when it was trading at over $18 per share at one point early last year

There didn’t seem to be the same reluctance to ask public shareholders share the ride down in stock price as the transformation strategy was implemented back then, or eagerness on his part to buy the stock at that price.

There is just inherent unfairness in the access management has when it decides it wants to buy a company it runs. But does that mean shareholders should turn the deal down? Those frustrations shouldn’t be the test.

At this point, what happened last year or the year before is irrelevant. What matters now for Dell shareholders is whether they should take $13.65 per share under today’s circumstances, or whether they should try to push Mr. Dell and/or Silver Lake into throwing some more value their way, whether they should throw out the board and put in Icahn and Southeastern’s board nominees and try to implement the Icahn proposal, or whether they should tell Mr. Dell to go back to work running Dell as a public company, as he seemed comfortable with until about a year ago.

All of those alternatives have downsides. But even though that negativity may be able to be explained by the history, that history is largely irrelevant as shareholders decide whether to take the $13.65 in cash or try another gambit which could involve greater risk, even if they believe there is a potential of more reward.